Roland Berger European Private Equity Outlook 20091211

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outlook 2010

Munich, Vienna, Frankfurt, December 2009



Contents Page

A. European private equity market overviewWhat will come after the crisis? 3

B. The PE environment is remaining difficultHow are the macro indicators developing? 9

C. A call for active PE performance improvement –What kind of fund manager is needed? 20

© 2009 Roland Berger Strategy Consultants GmbH 2



A. European private equity market overview

What will come after the crisis?

3



The European private equity market volume declined by 27% toEUR 54 bn in 2008 – 2009 looks even worse

European private equity investments [EUR bn]

39.4 -30.6 14.0 5.1 26.8% change p.a. 27.3 51.1

8.071.0

73.8

4.2 -27.0

16.0

7.1

54.0

47.0

10.7

19.79.8

8.4

10.3

.

29.127.7 65.8

46.9

15-20

FYVenture

55.0

35.0

25.1

36.9

24.3

.

8.5

20.717.9

1)

Buyout

.

12.115.314.4

26.6

4Source: EVCA; Roland Berger Research

Buyout Venture capital

1) No split in buyout and venture capital available – Full Year (FY) =estimate



Most national PE markets experienced significant setbacks in2008 – market volumes in CEE still lag far behind WE

European PE investments by country, 2006-2008 [EUR bn]

3.44.24.3

13.75

20.90

23.48

5.755.53

0.630.680.30

9.0811.8610.80

0.440.170.35

.

9.2110.607.23

0.86

0.030.020.02

2.344.233.58

......

5.413.17

4.92

..

0.090.560.04

5Source: EVCA

2007 20082006



Strong focus remains on late stage buyout financing – Now andin the future

European PE investments in terms of investment stage [EURbn; %]

715

870

Start-up

Seed

54.1

5

14

71.2

0

0

47.1

55

29.1

0

1

73.8

0301

24.3

2

33

21

7

Expansion

row

355

8

5

68 71

80

70

Replacement

capital5

45Buyout


2006 200820052003 20072001



Divestments will probably decline by 50% for the second year ina row in 2009 – funds raised and divestments almost seized??

European PE activity flows [EURbn]

112.3

-49%

79.6

81.4

71.8

54.0

74.071.0

27.527.0

47.0

36.9

29.1 27.133.129.8

19.6

5.7 6.92.8

..

H1 200920082007200620042003 2005

7Source: EVCA; Press; Roland Berger Research

DivestmentsInvestments

Funds raised



The question is: Will profits recover – or will the downturncontinue?

10-year rolling IRR(buyouts in Europe) [%]

REMARKS

>Only top funds can17.117.417.1

19.119.619.3

17.4

mee e g

demands of investors – thespread between

.14.9

11.2 11.611.7

15.415.3.

well performingfunds and lowperformers haswidened

.9.6

>Private equity fundsneed to take aclose look at levers


available for value

creation1992 1994 1996 1998 2000 2002 2004 2006 2008 2010



B. The PE environment is remaining difficult

How are the macro indicators developing?

9



Judging by macroeconomic indicators, the PE environment willremain difficult

Current situation

>The number and size of leveraged buyout deals has

decreased further due to limited availability of debt

>Leverage levels have decreased from over 6 timesEBITDA to multiples below 5, reducing the return on equity

Will thesetrends

>Many investments by PE firms are ready to go public, but

stock exchanges are not

–

Outlook for

>Profits remain under pressure – only top funds achievesatisfactory returns

10Source: Roland Berger Research



Market snapshot: The takeover market should have hit bottom – Recovery expected in the next few months

European takeovers by financial investors since 20071)

156151

187183184

200 25

20

189

97100

15

27

6355

50

5,0

10

0 0

Q4 20091)Q3 2009Q2 2009Q12009Q4 2008Q3 2008Q2 2008Q12008Q4 2007Q3 2007Q2 2007Q1 2007

11Source: Thomson Financial

Number of transactions [left scale]

1) Until November 23, 2009



Where is the PE market headed? From a macroeconomicperspective, economic growth is needed

Private equity activity vs. economic development1)

Economic

[annual change]eve opment

[annual change]PE

400 15Recession opportunity

Real GDP200

300 10

,

in times of low GDP growth weremore profitable

0

100

0

1st wave: 1980s 2nd wave: 1990s 3rd wave: today

-100 -5

1009080706050403029089888786 91 92 93 94 95 96 97 98 99 00 01

12Source: Roland Berger Research; Thomson One Banker; EIU

rea ng up

conglomerates

u mar e an cras ga n – u mar e an

another crash

1) M&A with PE involvement



Most European countries will achieve positive growth rates in2010 – Will this be enough to fuel growth in the PE market?

Data forecast for 2010 –Year-on-year GDP change

>Not all European economies areback on track for recovery – e.g.S ain will continue to suffer in

2010>Economic stimulus packages in

many countries will support

Sweden(1.3)

UK 0.6

Poland (1.9)

v y

>The V shaped recovery seems tobe most likely

zec epu c .

France 0.9

Germany(1.0)

Hungary-1.0

Netherlands (0.5)

Austria Romania (1.0)

Slovakia (1.5)

key to securing returns especiallyin low-growth industries

Italy(0.6)

Spain(-0.8)

(0.8)Bulgaria (1.0)

13Source: EIU

Trend: Influence:



Low interest rates are becoming increasingly crucial for bearing the financing burden

Private equity activity vs. lending ratesLending rate

PE400 15

[annual change]eve opment

[%]

200

300

10

0

1005


-100 0

07 08 090099989796959493 06050403020192919089888786

14Source: Roland Berger; Thomson Financial; EIU

rea ng up

conglomerates


another crash



Interest rates came down strongly to stimulate liquidity in creditmarkets – However, restricted access to cheap debt for PEs

Lending rates in Europe and USALending rates [%] REMARKS

> Interest rates will most likely start torecover, increasing the price of

10

> Increasing interest rates could lead toover-leveraged companies anddefaulting credits

USA

6

7

8

> Due to the financial crisis banks frozetheir lax credit policies (e.g. tighteningfinancial covenants) and thus

negatively impacted the access of PEsEurope3

4

5

to cheap debt financing

> Investments will have to earn higherreturns to serve the credit lines; value

– –0

1

2

15Source: Roland Berger Research; Bloomberg; ECB

. .becomes more important

2009200820072006200520042003

Trend: Influence:



A lack of confidence in European banks made moneyexpensive in 2008 – Spreads back to normal in 2009

Development of interest spread [discount rate vs. 3-month Euribor]

Euribor, 3-month offered rateStart of

subprime crisis

4.5

5.0

5.5

Main refinancing rate

3.0

3.5

4.0

2.0

2.5

0.5

1.0

.

16Source: Bloomberg

.

January 2009January 2008July 2007 July 2008 July 2009January 2007



Healthy stock markets normally provide exit options for PEinvestments – In most cases with a time lag

Private equity activity vs. stock market developmentStock market

[Year-on-year change]eve opment

[Year-on-yearchange]PE

400 100

200

300

50

0

1000


-100 -50

0908070605040302010099989796959493919089888786 92

17Source: Roland Berger Research; Thomson One Banker; Bloomberg

rea ng up

conglomerates


another crash



European stock markets not likely to boom in 2010 – Onlyslight growth expected

Forecast data 2010 –Stock market

Stock market development (example: Euro Stoxx)

Euro Stoxx, price development, since J an 2007 [index]

REMARKS

> European stocks recovered

after hitting rock bottom in5,000

March 2009

> IPOs for PE investments

remain difficult4,000

4,500

> Restructuring investments

to ensure profitable exits on

the secondary market is2 500

3,000

3,500

important

1,500

2,000

18Source: Bloomberg; BayernLB

Forecast

2010 Trend: Influence:



OUTLOOK: The PE environment remains difficult

Outlook

> GDP growth in Europe will recover starting in 2010 and thus positively affect privateequity industry performance

> -

financing for existing portfolio companies –will be smaller in terms of volume,covenants will be stricter and costs will be higher

,increased risk of default

> After the rebound in 2009, the outlook for European stock markets in 2010 remainscautious very limited options for profitable IPO exits

Value creation through thorough due diligence, active portfol io management and

19Source: Roland Berger; DB Research

restructuring wil l separate successful investments from the rest



C. A call for active PE performance improvement –

What kind of fund manager is needed?

20



Where does the profit come from when the businessenvironment remains unfavorable?

Sources of profit

1. 2. 3.

Due dil igence &purchase price

Investmentperformance

Selling price Investors have tomanage three

Assess target

potentials in effective

Actions designed to

ensure and drive

Selection of the right

moment and exitorder to meet the

high performance

Low purchase price in

relation to fair value;

(cut costs, improve

sales, reduce working

highest value

focus on

acquisition and

21

,

Source: Roland Berger



Today, the financial value creation drivers in buy-outs cannotachieve satisfactory returns

Financial drivers for value creation

> Interest rates in Europe low but

expected to start rising

> Avera e levera e on LBOtransactions

today still at around 5*EBITDAIncreased risk of financial distress Leverage

> Most companies restructured

> Returns for strategic

buyers

> Increased competition for VALUE

ManagementMultiple

> Many secondary buy-outs

Realizing the improvement

otential is becomin more

PE players

"Buy low, sell high"

more and more

22

s are o ngncreaseand more challenging difficult




ACQUISITION – DUE DILIGENCE1.

To extract the ful l investment value, operational improvementsare necessary – Due diligence to assess potential

Operational value creation drivers

Carefully selecting andGenerating synergies by

companies

REALIZING V ALUE

Realizing stand-alone

improvements through

cost savin

Growing through

strategic realignment

and sale -u action

23Source: Roland Berger



ACQUISITION – DUE DILIGENCE1.

Revised business plans are the basis for company valuationand decision making

Overview –commercial due diligence

due diligenceMarket

Drivers, volume, growth

potentials, trends

C O M

M A K I N

CompetitivenessCorporate and business

strategy, products, competition

E R C I A L

T H E

Business plan

Plausibility checks (revenues,

Balance sheet

Cashflow

D U E

D

I G H T

D

Identification of improvement levers

Synergies, stand-alone cost savings,

I L I G E N

E C I S I O

24

growth opportunities Improvement actionsE S




ACQUISITION – PURCHASE PRICE1.

Leverage ratios are coming back down – In the first half of 2009, total debt to EBITDA was 4.9

Leverage ratios [total debt to EBITDA, European LBOs]

4.905.17

6.12

5.505.23

.

4.254.164.17

4.39

25Source: EVCA Barometer; S&P LCD; Roland Berger Research



HOLDING PERIOD2.

The holding period offers the largest potential for valuecreation – This requires active PE investors

ROI improvement1) in 2 years, US restructuring cases [% points]

63.462.1 64.7

involvement inrestructuring29.7 29.8

45.7

"

return for

investor

investor

position" (w/o board

participation)

function function

26Source: Roland Berger

1)Operating profit to total assets

Investor influence



HOLDING PERIOD2.

Comprehensive restructuring definitely has a positive impacton value creation

Development of cumulative abnormal return in comparison to CDAX

500% 500%

MINOR DOWNSIZING –

FOCUS ON COSTS

SUBSTANTIAL DOWNSIZING –

FOCUS ON COSTS AND GROWTH

300%

400%

300%

400%

+245%

+483%Top 20%

100%

200%

100%

200%

+54%

Top 20% +136% Average

-100%

0%

-100%

0%

-54%Flop 20%

-100%Flop 20%

27

0-20

days

+2

years

+1

year

-20

days

+2

years

+1

year

0

Source: Thomson Financial; Datastream; Dow J ones & Reuters; Factiva; Roland Berger Research



EXIT3.

Generating value through exit is rather l imited within currentchannel options

Exit channels by number of divestment [%]

>Trade sale to strategic investorsremains the most important exit10.6

23.9

23.0

Trade sale

c anne n

>Sale to secondary PE investorsremains difficult given restricted

6.6

10.9

11.7

Total loss/

writeoff

ava a y o e

>Writeoffs increased to over10% of total exits9.4

7.4

5.8

7.5

IPO

Sale to mgmt.

(MBO)

>IPO in current market conditionsnearly impossible

42.1

41.0

.

Other (mainly

repayments)

28Source: EVCA Yearbook 2008; Roland Berger Research

2007

2008



Conclusion: A successful fund manager must be a companydealer and a top manager rolled into one

Conclusion

>Private equity funds are facing high return expectations by their investors that only few in the industry

can meet

" ". ,

in companies is very difficult

>To stand out from industry average, all available value creation levers must be used, especially in the

holding period

>Established management approaches are the main tools – restructuring, por tfolio management and

value mana ement. In a l in these tools, the rivate e uit fund mana er has to demonstrate that heis superior to "normal" conglomerate managers

> A successful private equity fund manager must be a company dealer and a top manager rolled into

–

29

Roland Berger European Private Equity Outlook 20091211

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